5 Tier 1 Dividend Growth Stocks

"And, by the way, the bulk of the billions in Berkshire Hathaway has come from the better businesses. ... And most of the other people who've made a lot of money have done so in high-quality businesses." -- Charlie Munger

At Tier 1 Investments, a Motley Fool Real-Money Portfolio, I seek out and invest in elite businesses. These include companies with the most valuable brands, best management, superior products and services, and strongest competitive advantages. This strategy has proved to be very effective, with Tier 1 returning 49% since its inception nearly two ago, which has outperformed the S&P 500 by nearly five percentage points during that time.

But I also appreciate the power of dividend growth when it comes to earning market-beating returns. In fact, a study by C. Thomas Howard published in Advisor Perspectives found that for every percentage point a stock's yield rises, its annual return increases by 0.22 percentage points if it's a large cap, 0.25 if it's a mid cap, and 0.46 if it's a small cap. Even better, Howard found that dividend-growing stocks outperformed dividend cutters by 10 percentage points per year from 1973 to 2010 and beat both flat- and no-dividend stocks. And the icing on the cake is that Howard showed that this outperformance came with a third less volatility. Higher returns, less volatility-induced stress, and a steadily growing income stream -- three powerful aspects of dividend growth investing that can help you grow your wealth.

With that in mind, here are five elite Tier 1 enterprises that have grown their dividends substantially during the past year.

Company

1-Year Dividend Growth Rate

MasterCard

100%

Visa

50%

Whole Foods Market

42%

Starbucks

24%

Apple

15%

Source: S&P Capital IQ.

MasterCard and Visa are dominant global credit card payment networks. Both companies have built valuable brands and enjoy powerful network effects. And with 85% of global transactions still being made via cash or check, MasterCard and Visa are extremely well positioned to profit from the massive global shift toward electronic payments and away from cash transactions. Their strong cash flows should allow them to continue to boost their dividend payouts in the years ahead.

Whole Foods Market is far more than simply a premium-priced grocery store; it's fast becoming a premium lifestyle brand and has earned a reputation as a purveyor of some of the healthiest foods and beverages on the market, at a time when consumers are beginning to care more and more about what they put into their bodies. Its strong competitive position in the natural and organic foods market should lead to sustained growth in its store count, revenue, profits, and ultimately, the dividends it pays to shareholders.

Starbucks is the dominant brand among coffeehouses in the United States and, increasingly, around the globe. This Tier 1 business is taking more control over the customer experience by bringing more of the product lines sold in their cafes in-house. From food items via La Boulange to juices through Evolution Fresh and now yogurt thanks to its recent partnership with Danone, Starbucks is taking action to improve the quality of its offerings. I think that will help drive significant same-store sales growth at it cafes, as well as dividend increases for its shareholders.

Apple is a company that needs little introduction. Its beloved brand, high-quality products, powerful ecosystem, and cash-filled balance sheet are well known among investors. Yet I believe they are being substantially undervalued by market participants. With a host of catalysts that could drive its share price higher, I expect Apple to outperform the market and continue to boost its dividend in the years ahead.

The Foolish bottom lineHad you invested in these companies in the last year, you would have enjoyed total dividend increases ranging from 15% to 100%. That level of growth would provide a substantial boost to just about any investor's dividend income. But more important to investors today is to identify the companies that will grow their dividends substantially in the years ahead. If you're interested in hearing about some more companies that are likely to boost their dividends from this point forward, I'd like to offer you a brand-new free report from The Motley Fool's expert analysts called "Secure Your Future With 9 Rock-Solid Dividend Stocks." Today I invite you to download it at no cost to you. To discover the identities of these companies before the rest of the market catches on, you can access this valuable free report by simply clicking here now.

Joe Tenebrusomanages a Real-Money Portfoliofor The Motley Fool and is an analyst on The Fool's Stock Advisor and Supernova premium service teams. You can connect with him on Twitter: @Tier1Investor. Joehas short January 2014 $75 puts on Starbucks. The Motley Fool recommends and owns shares of Apple, Berkshire Hathaway, MasterCard, Starbucks, Visa, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.